Calculating Contracted Out Deduction

kingsleypne

My wife was officially contracted out from around 1988/89 but stopped working in 1991 to become a full-time housewife and hasn't returned to work since. She has 29 qualifying years, some of these being credits (home responsibilities protection scheme??).

I'm trying to figure out what her foundation amount might be. I know what she'll get under the current system but not how much she might get under the new flat-rate system as I don't understand how they'll calculate her contracted out deduction. Anyone have any ideas?

SeekTruth

As you know, her Foundation Amount will be the greater of two calculations:

Calculation No. 1: her entitlement under current rules, which you state you already know.

Calculation No. 2: her entitlement under new rules. So with 29 qualifying years this will be 29 / 35 x £148ish minus Rebate Derived Amount (RDA). So about £123 - RDA.

For someone whose only contracted out service is prior to April 1997 their RDA will equal their Contracted Out Deduction and will also equal their GMP.

State Pension Forecasts used to state the Contracted Out Deduction, but unfortunately stopped including this useful information some years ago. But your wife should have a statement somewhere of her GMP entitlement, perhaps from when she left work in 1991. You would need to establish how the GMP has been revalued during deferment. If she was in a public sector scheme then it is most likely to have been revalued in line with earnings (Section 148 orders, see http://timeline.lge.gov.uk/s148/uksi_20140367_en.pdf). If she was in a private sector scheme then it is most likely to have been revalued by a fixed percentage (http://www.scottishlife.co.uk/scotlife/web/site/Adviser/TechnicalCentralArea/Rates&FactorsArea/FixedRateGMPRevaluation/FixedRateGMPRevaluationHome.asp), in her case 7.5% per year.

kingsleypne

Thank you - that was really helpful. Your reply prompted me to look through her old pension statements and the one dated from 25/4/2011 did indeed specify a contracted out deduction of £8.07. Will this sum have gone up through some sort of inflation index? Are these published anywhere so that I can work it out what the amount will be today?

SeekTruth

kingsleypne wrote: »

Thank you - that was really helpful. Your reply prompted me to look through her old pension statements and the one dated from 25/4/2011 did indeed specify a contracted out deduction of £8.07. Will this sum have gone up through some sort of inflation index? Are these published anywhere so that I can work it out what the amount will be today?

The COD is altered annually in the same way as GMP. So it is either increased by 7.5% per annum, or it is increased in line with average earnings (Section 148 Orders).

Your wife's pension scheme made the decision back in 1991 as to which revaluation method would be applied to her GMP. There have been 3 different methods that have been permitted by law. As stated previously, the tendency has been for public sector schemes to use the Section 148 Orders and private sector schemes to use fixed rate revaluation. The third method, as I understand it, has not been used much.

xylophone

http://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

http://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/

She can obtain information from the scheme administrator.